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| July 1, 2005 | The
Newspaper of the NYSSCPA |
Vol.
8, No.12 |
Update on Interpretation 101-3, Performance of Nonattest Services
By Raymond M. Nowicki and Andrew M. Cohen
In late January the American Institute of CPAs’ Professional Ethics Executive Committee (PEEC) adopted revisions to Interpretation 101-3, Performance of Nonattest Services. Interpretation 101-3 applies when an AICPA member renders nonattest services (for example, providing bookkeeping services) to an attest client. An attest engagement is an engagement that requires independence as defined in AICPA professional standards. The revisions to the Interpretation were adopted to clarify the applicability and intent of the rule and to ensure its continued effectiveness in promoting independence when a member renders nonattest services to an attest client.
The revisions to the Interpretation are as follows:
1. The term “competence” was replaced with the words “suitable skill, knowledge, and/or experience.” The term “employee” was replaced with “individual.” These changes clarify that the person designated by the client to oversee the nonattest service could be the owner of the company, a company employee, or an individual outside the company, such as an outsourced bookkeeper or controller.
2. The revisions also underscore that the failure to document the understanding with the client would not impair independence if such an understanding has been established. The failure to document, however, would be considered a failure to comply with ethics standards under Rule 202 (Compliance with Standards).
3. The revisions clarify that routine activities are exempt from the general requirements relating to the client’s agreement to perform the functions of making management decisions, designating a competent individual, evaluating the adequacy and results of the services performed, accepting responsibility for the services performed, and establishing and maintaining internal controls, including monitoring ongoing services. Written documentation also is not required for routine services. The PEEC intends to develop a definition of what would be considered routine activities. It is likely that the definition will include services that do not constitute management functions, such as general business advice and recommendations to assist the client in performing its functions and making decisions.
The above revisions are not intended to change the meaning of the rules. They were made principally based on feedback and comments from members that the Interpretation’s requirements needed clarification.
Interpretation 101-3 became effective for engagements on Jan. 1, 2004. The documentation requirements became effective Jan. 1, 2005. The documentation requirements require the member to establish in writing (although note #2 above) his or her understanding with the client regarding the following:
1. Objectives of the engagement
2. Services to be performed
3. Client’s acceptance of its responsibilities
4. Member’s responsibilities
5. Any limitations on the engagement.
In the January 2005 Trusted Professional article the authors published a toolkit in the form of an internal memo to satisfy the documentation requirement. In addition, it was suggested that the documentation could be included in the firm’s engagement letters with clients. Since the requirement to document is required prior to performing nonattest services for an attest client, documentation in a representation letter alone would not be appropriate to comply with the standard, because such documentation typically occurs after the nonattest services are performed. Nonetheless, the representation letter could be useful in confirming your client’s understanding.
Interpretation 101-3 is here to stay. CPAs must become familiar with its requirements and apply the rules in their practice when they perform nonattest services to attest clients, especially taking care to fulfill the documentation requirement. If clients have suitable skills, knowledge and experience, the AICPA member can remain independent by having meaningful discussions with attest clients regarding nonattest services performed. Examples of such discussions concern issues in connection with the preparation of tax returns, the explanation and approval of entries made in a bookkeeping engagement, or the recording of tax accruals. In fact, some CPAs have expressed that Interpretation 101-3 creates an opportunity to spend more time with the client and helps strengthen their relationships.
For more information, visit the NYSS-CPA Web site at www.nyscpa.org or the AICPA Web site at www.aicpa.org, or call the NYSSCPA at 800-697-7272 or the AICPA ethics hotline at 800-841-5380.
Editor’s Note: The following article is the third in a series the authors have written on Interpretation 101-3. The preceding articles appeared in the January 2005 and February 1, 2005, issues of The Trusted Professional.
Raymond M. Nowicki, CPA, partner with Nowicki and Company LLP in Buffalo, is a member of the NYSSCPA’s board of directors. Andrew M. Cohen, CPA, partner-in-charge of the Long Island practice of Weiser LLP, is a past member of the Society’s board.
